Capital expenditure and economic growth: A disaggregated analysis for Nepal

Figures & data

Figure 1. Trends of capital expenditure 1974/75–2019/20.

Data source: Nepal Rastra Bank (2020)

Figure 2. Capital and current expenditure (Rs. million).

Data source: Nepal Rastra Bank (2020)

Figure 3. Capital expenditure by month for three fiscal years (%).

Data source: Unpublished data from the Ministry of Finance, Government of Nepal.

Table 1. Unit root test results at the level

Variables	Level with intercept				Level with intercept & trend
	DF	ADF	PP	KPSS	DF	ADF	PP	KPSS
GDPPCG	−6.15***	−6.74***	−6.76***	0.24	−5.72***	−7.13***	−14.13***	0.50***
CAPEXP	−0.98	−1.07	−0.92	0.64**	−2.26	−2.51	−2.51	0.13*
CUREXP	1.05	0.55	1.66	0.31	1.05	0.55	1.66	0.09
GCF	−1.81	−2.23	−2.09	0.70**	−4.13***	−4.03**	−3.91**	0.12*
TOTEDU	−1.83*	−2.23	−1.34	0.32	−2.32	−0.52	−0.77	0.14*
TOTHEALTH	−4.27***	−4.55***	−4.57***	0.43*	−5.02***	−4.92***	−4.92***	0.13*
TOTMILTEXP	−1.70*	−1.91	−1.68	0.45*	−2.65	−2.57	−1.87	0.09
PRIMSENRL	−1.48	−3.44**	−3.29**	0.71**	−5.25***	−5.21***	−5.20***	0.16**
SECSENROL	1.88	0.43	0.25	0.74***	−1.95	−1.08	−1.08	0.31**
CUREDUEXP	−1.14	−1.28	−1.40	0.76***	−1.85	−0.29	−0.29	0.17**
CURHEALTHEXP	−1.16	−1.43	−1.45	0.62**	−1.56	−1.12	−1.28	0.12*
CAPEDUEXP	−0.97	−0.99	−0.83	0.68**	−2.72	−3.41*	−3.45*	0.11
CAPEHEALTHEXP	−5.76***	−5.69***	−5.69***	0.51**	−5.96***	−5.82***	−5.82***	0.18**
Critical value at 1%	−2.63	−3.61	−3.61	0.73	−3.77	−4.21	−4.21	0.22
at 5%	−1.94	−2.93	−2.94	0.46	−3.19	−3.53	−3.53	0.15
at 10%	−1.61	−2.61	−2.61	0.35	−2.89	−3.20	−3.20	0.12

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% level of significance, respectively.

Table 2. Unit root test results at the first difference

Variables	Level with intercept				Level with intercept & trend
	DF	ADF	PP	KPSS	DF	ADF	PP	KPSS
CAPEXP	−4.48***	−5.67***	−6.13***	0.14	−5.10***	−5.59***	−6.10***	0.14*
CUREXP	−6.98***	−6.89***	−6.89***	0.24	−7.31***	−7.13***	−8.33***	0.12*
TOTEDU	−4.38***	−4.71***	−4.56***	0.31	−4.98***	−5.04***	−4.66***	0.12*
TOTMILTEXP	−3.68***	−3.91***	−3.89***	0.09	−3.88***	−3.84**	−3.83**	0.08
SECSENROL	−4.33***	−4.35***	−4.21***5	0.16	−4.29***	−4.35***	−4.07***	0.08
CUREDUEXP	−4.92***	−4.85***	−4.82***	0.32*	−5.01***	−5.03***	−4.95***	0.13*
CURHEALTHEXP	−6.48***	−6.48***	−6.48***	0.23*	−6.29***	−6.50***	−6.50***	0.17
Critical value at 1%	−2.63	−3.61	−3.61	0.74	−3.77	−4.21	−4.21	0.22
at 5%	−1.94	−2.93	−2.94	0.46	−3.19	−3.53	−3.53	0.15
at 10%	−1.61	−2.61	−2.61	0.35	−2.89	−3.20	−3.20	0.12

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% levels of significance, respectively.

Table 3. Long-run coefficients of ARDL model, expenditure at an aggregate level

Regressor	(1)	(2)
CAPEXP —Capital expenditure GDP %	0.001	−0.09
	(0.061)	(0.115)
CUREXP—Current expenditure GDP %	−0.176*	−0.0175
	(0.098)	(0.152)
GCFORM—Gross capital formation GDP %	0.359***	0.243***
	(0.073)	(0.069)
PRIMEN—Primary school enrolment gross %	−0.011**
	(0.005)
SECEN—Secondary school enrolment gross %		0.032
		(0.045)
Number of observations	40	40
R-squared	0.75	0.52
F-test (bound)	6.77	5.49
ARDL lag selection	(3,0,0,4,0)	(2,0,0,0,0)

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% levels of significance, respectively. The standard errors are in parentheses. GDPPCG is the dependent variable.

Table 4. Long-run coefficients of ARDL model, expenditure at disaggregate level-I

Regressors	(3)	(4)
GCFORM—Gross capital formation GDP %	0.11**	0.12**
	(0.056)	(0.056)
TEDUEX—Total education expenditure GDP %	1.20***	1.14***
	(0.428)	(0.425)
THLTHEX—Total health expenditure GDP%	0.026	0.012
	(0.331)	(0.335)
MILTEXP—Total military expenditure GDP %	−0.681
	(0.752)
LFORCE—% of working aged population	−0.021	−0.067
	(0.157)	(0.152)
Number of observations	40	40
R-squared	0.65	0.65
F-test (bound)	12.43	15.46
ARDL lag selection	(2,0,2,0,0,0)	(2,0,2,0,0)

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% levels of significance, respectively. The standard errors are in parentheses. GDPPCG is the dependent variable.

Table 5. Long-run coefficients of ARDL model, expenditure at disaggregate level-II

Regressor	(5)
GCFORM—Gross capital formation GDP %	0.16*
	(0.092)
CAPEDUEX—Capital education expenditure GDP %	5.59***
	(1.29)
CAPHLTHEX—Capital health expenditure GDP%	0.619**
	(0.321)
CUREDEX—Current education expenditure GDP %	2.57***
	(0.791)
CURHLTHEX—Current health expenditure GDP %	−1.4628
	(1.791)
LFORCE— % of working aged population	0.27
	(0.199)
Number of observations	40
R-squared	0.85
F-test (bound)	14.34
ARDL lag selection	(2,2,2,0,2,2, 2)

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% levels of significance, respectively. The standard errors are in parentheses. GDPPCG is the dependent variable.

Table 6. Short-run ECM coefficients of ARDL models

Regressor	(1)	(2)	(3)	(4)	(5)
dGDPPCG1	0.87***	0.52***	0.44***	0.423***	0.43***
	(0.267)	(0.150)	(0.154)	(0.152)	(0.152)
dGDPPCG2	0.36**
	(0.147)
dCAPEXP	0.024	−0.255
	(0.152)	(0.226)
dCUREXP	−0.44*	−0.39
	(0.235)	(0.259)
dGCFORM	0.408***	0.42***	0.23**	0.24**	0.31***
	(0.088)	(0.113)	(0.111)	(0.110)	(0.110)
dGCFORM1	−0.46***				0.49***
	(0.151)				(0.158)
dGCFORM2	−0.45***
	(0.119)
dGCFORM3	−0.29***
	(0.102)
dPRIMEN	−0.02*
	(0.014)
dSECEN		0.11
		(0.090)
dTEDUEX			−0.51	−0.75
			(0.908)	(0.867)
dTEDUEX1			−3.02**	−3.02**
			(1.242)	(1.238)
dTHLTHEX			0.05	0.02**
			(0.669)	(0.666)
dMILTEXP			−1.38
			(1.537)
dLFORCE			−0.04	−0.14	−6.86***
			(0.318)	(0.299)	(2.338)
dCAPEDUEX					2.6474*
					(1.546)
dCAPEDUEX1					−6.68***
					(1.83)
dCAPHLTHEX					1.32**
					(0.649)
dCUREDEX					−1.29
					(1.045)
ecm(−1)	−2.49***	−2.02***	−2.02***	−1.98***	−2.13***
	(0.405)	(0.246)	(0.243)	(0.239)	(0.241)

Notes: ***, ** and * indicate the values are significant at 1%, 5% and 10% levels of significance, respectively. The standard errors are in parentheses. GDPPCG is the dependent variable.

Table

Test	Test statistics	Break Point	Year	Asymptotic critical values
				1%	5%	10%
ADF	−5.53	28	2008	−6.92	−6.41	−6.17
Zt	−5.16	30	2010	−6.92	−6.41	−6.17
Za	−47.09	30	2010	−90.35	−78.52	−75.56
Number of observations: 40
Maximum lag: 2, chosen by Bayesian criterion

Table

Variables	Details	Data source	Expected sign
GDPPCG	GDP per capita growth%	World Bank (2023)	Dependent variable
CAPEXP	Capital expenditureGDP %	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+
CUREXP	Current expenditureGDP%	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+ or -
GCFORM	Gross capital formation GDP %	World Bank (2023)	+
PRIMEN	Primary school enrolment gross %	World Bank (2023)	+
SECEN	Secondary school enrolment gross%	World Bank (2023)	+
TEDUEX	Total education expenditure GDP %	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+
THLTHEX	Total health expenditure GDP%	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+
MILTEXP	Total military expenditure GDP %	World Bank (2023)	-
LFORCE	Working aged population % on total population	World Bank (2023)	+
CAPEDUEX	Capital education expenditure GDP %	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+
CAPHLTHEX	Capital health expenditure GDP%	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+
CEDEX	Current education expenditure GDP %	Nepal Rastra Bank (2017) and Ministry of Finance (2021)	+ or -
CURHLTHEX	Current health expenditure GDP %	Current health expenditure GDP %	+ or -

Figure C1. Plot of CUSUM and CUSUMQ plots for model specification (1).

Figure C2. Plot of CUSUM and CUSUMQ plots for model specification (2).

Figure C3. Plot of CUSUM and CUSUMQ plots for model specification (3).

Figure C4. Plot of CUSUM and CUSUMQ plots for model specification (4).

Figure C5. Plot of CUSUM and CUSUMQ plots for model specification (5).

Nepal Rastra Bank. (2020). Current macroeconomic and financial situation. Baluwatar.

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